Party's Exit Imperils India Government

KOLKATA—India's plans for economic overhauls were thrown into disarray, along with its government's prospects for survival, as a crucial ally of the ruling coalition said it would withdraw over plans to let foreign supermarkets operate in the country.

The Trinamool Congress has decided to leave the government over plans unveiled last week, said Mamata Banerjee, the party's head and the chief minister of India's West Bengal state. An entrance of big foreign supermarkets, she said, would hurt small-time Indian retailers.

"Our ministers will go to New Delhi on Friday and submit their resignations," Ms. Banerjee said Tuesday. "We are sorry, but we had to take this hard decision."

Prime Minister Manmohan Singh's governing United Progressive Alliance, which relies on Trinamool's 19 seats to form its Parliamentary majority, isn't likely to fall immediately. Parliament isn't in session and won't meet again until December. His Congress party, which forms the core of the UPA, may be able to rely on independent parties to stay in power even if the opposition calls for a no-confidence vote in December, analysts say.

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Trinamool's Mamata Banerjee.
Agence France-Presse/Getty Images

Still, Trinamool's defection adds to political turmoil in India and could imperil the economic measures taken by the government last week, which also include allowing greater overseas participation in India's airline and broadcasting sectors, as well as boosting diesel-fuel prices to lower subsidies. The measures are being closely watched not only by foreign firms, but also by global investors who see a vital India as an important factor in spurring global growth.

Last year, under pressure from Ms. Banerjee, the government suspended an earlier decision to let foreign supermarkets such as Wal-Mart Stores Inc. and Carrefour SA open in India.

Investors fear the government could again change direction, although Mr. Singh vowed over the weekend not to do so. Calling the overhauls crucial for India to reverse a bleak economic outlook—the country's growth rate is below 6%, its lowest in nearly a decade—he cautioned that failure to adopt the measures could cause a "collapse" of growth to around 5% annually.

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The government doesn't need Parliament's approval for the latest measures. But getting other legislation through Parliament without Ms. Banerjee's support is likely to be even trickier. The main opposition Bharatiya Janata Party and smaller regional parties also have opposed the reforms, threatening a nationwide strike Thursday.

Any government backtracking, meanwhile, is likely to draw criticism from investors and ratings agencies, who say the measures are crucial to attract foreign capital and restore growth.

"If the Congress party succumbs to the blackmail, it'll give out a very wrong signal," said B.G. Verghese, a political analyst at the Center for Policy Research, a New Delhi-based think tank. "It'll just show that if enough pressure is mounted, the party can be forced to go back on their reform agenda."

A Congress party spokesman, Rashid Alvi, wouldn't comment on whether the government would reconsider its position. But he said it had "respect" for Trinamool and would discuss the overhauls further with the party in the days ahead.

For foreign retailers, India may present even greater longer-term challenges, however. Even if measures to open India's retail sector become reality, firms are likely to face other impediments to investment—including archaic laws, rickety infrastructure and difficulty in buying land, industry participants say.

Added to that, the government last week gave India's 29 states the power to opt out of the retail measure, and a number of states have accepted that offer. Only nine states—with fewer than half of the country's 1.2 billion people—have so far said they will permit investments. Foreign retailers are further restricted to opening only in cities with more than one million people, a rule aimed at protecting smaller Indian retailers.

"There are a lot of challenges," said Thomas Verghese, chairman of the Confederation of Indian Industry's national committee on marketing. "You will see real results only over a period of four to five years."

Another obstacle to building up retail stores, experts say, will be the difficulty of acquiring land in India, where companies often have to get multiple permits from various government agencies, and different states have different laws on land acquisition and zoning. The poor quality of roads, warehouses and cold storage facilities could eat into foreign operators' profit margins.

A maze of taxation—such as local road taxes, sales taxes and others levies—could further add to costs, other observers said. "It all adds up to a whole lot of documentation and taxes, and adds up to the challenges," said Vasant Nangia, managing director of Fossil India Ltd., a unit of the global retailer. He said the lack of availability of trained manpower could also slow investments.

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India's current political instability comes after a difficult few months for Mr. Singh's Congress. The government has faced increasing calls from the opposition BJP to resign amid allegations that its process of allocating coal blocks to private companies was corrupt. Mr. Singh has denied wrongdoing and blamed the BJP for causing disturbances.

To regain the initiative, the government last week unveiled its economic measures, among the most significant overhauls since India opened its economy in 1991. Since then, parties from across the political spectrum, including Ms. Banerjee's, have protested.

Ms. Banerjee's party has opposed the move to open retail to foreigners since last year, arguing it will drive local Indian retailers out of business.

"The livelihoods of about 500 million people in India are tied to the retail sector. If we don't oppose foreign direct investment in retail, where will these people go? How will they survive?" Ms. Banerjee said Tuesday. She added that she wouldn't be held responsible if her actions caused early elections. The UPA government, whose second term began in 2009, must hold national polls in 2014.

Trinamool has one federal cabinet member, Railway Minister Mukul Roy, and five junior ministers, who Ms. Banerjee said will be leaving their positions Friday.

Congress is likely hoping to draw on the support of the Samajwadi Party in the event of a no-confidence vote, said Sanjay Kumar, a fellow at the India-based Center for Study of Developing Societies, a think tank.

The Samajwadi Party isn't formally part of the Congress's United Progressive Alliance coalition government but it often backs the government.

A spokesan for the Samajwadi Party, Ram Gopal Yadav, refused to say what role it would play. "The Congress should not take our support for granted," he told NDTV, an Indian cable news channel.

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